Publication 225
Farmer's Tax Guide

For use in preparing 2002 Returns

Acknowledgment:

The valuable advice and assistance given us each year by the National Farm Income Tax Extension Committee is gratefully acknowledged.

Advance Payment of Earned Income Credit

An employee who is eligible for the earned income credit (EIC) and who has a qualifying child is entitled to receive EIC payments with his or her pay during the year. To get these payments, the employee must give you a properly completed Form W-5, Earned Income Credit Advance Payment Certificate. You are usually required to make advance EIC payments to employees who give you a properly completed Form W-5, but you are not required to make these payments to farm workers paid on a daily basis.

The payment is added to the employee's pay each payday. It is figured from tables in Circular A. You reduce your liability for income tax withholding, social security tax, and Medicare tax by the total advance EIC payments made. For more information, see Circular A.

Notification.   You must provide notification about the EIC to each employee who worked for you at any time during the year and from whom you did not withhold any income tax. However, you do not have to notify employees who claim exemption from withholding on Form W-4.

You meet the notification requirement by giving each employee any of the following.

• Form W-2, which contains the notification on the back of Copy B.
• A substitute Form W-2 with the exact EIC wording shown on the back of copy B of Form W-2.
• Notice 797, Possible Federal Tax Refund Due to the Earned Income Credit (EIC).
• Your own written statement with the exact wording of Notice 797.

For more information about notification requirements and claiming the EIC, see Notice 1015, Have You Told Your Employees About the Earned Income Credit (EIC).

Reporting and Paying Social Security, Medicare, and Withheld Income Taxes

You must withhold income, social security, and Medicare taxes required to be withheld from the salaries and wages of your employees. You are liable for the payment of these taxes to the federal government whether or not you collect them from your employees. If, for example, you withhold less than the correct tax from an employee's wages, you are still liable for the full amount. You must also pay the employer's share of social security and Medicare taxes.

Form 943.   Report withheld income tax and social security and Medicare taxes on Form 943. The 2002 form is due by January 31, 2003 (or February 10 if the taxes were timely deposited in full).

Deposits.   Generally, you must deposit both the employer and employee shares of social security and Medicare taxes and income tax withheld (minus any advance earned income credit payments) during the year. However, you may make payments with Form 943 instead of depositing them if you accumulate less than a $2,500 tax liability during the year (line 11 of Form 943) and you pay in full with a timely filed return.

For more information on deposit rules, see Circular A.

Electronic Federal Tax Payment System (EFTPS).   You may have to deposit taxes using EFTPS. You must use EFTPS to make deposits of all depository tax liabilities (including social security, Medicare, withheld income, excise, and corporate income taxes) you incur in 2003 if you deposited more than $200,000 in federal depository taxes in 2001. If you first meet the $200,000 threshold in 2002, you must begin depositing using EFTPS in 2004. Once you meet the $200,000 threshold, you must continue to make deposits using EFTPS in later years even if subsequent deposits are less than the $200,000 threshold.

If you must use EFTPS but fail to do so, you may be subject to a 10% penalty.

If you do not have to use EFTPS because you did not meet the $200,000 threshold, you can voluntarily make deposits using EFTPS. If you are using EFTPS voluntarily, you will not be subject to the 10% penalty if you make a deposit using a paper coupon.

For information about EFTPS, access the IRS web site on the Internet at www.eftps.gov, or see Publication 966, Now a Full Range of Electronic Choices to Pay ALL Your Federal Taxes.

To enroll in EFTPS, call one of the following phone numbers.

• 1-800-945-8400
• 1-800-555-4477

Or to enroll online, visit www.eftps.gov.

Form W-2.   By January 31, you must furnish each employee a Form W-2 showing total wages for the previous year and total income tax and social security and Medicare taxes withheld. However, if an employee stops working for you and requests the form earlier, you must give it to the employee within 30 days of the later of the following dates.

• The date the employee requests the form.
• The date you make your final payment of wages to the employee.

See Form W-2 under Information Returns in chapter 2.

Trust fund recovery penalty.    If you are responsible for withholding, accounting for, depositing, or paying withholding taxes and willfully fail to do so, you can be held liable for a penalty equal to the tax not paid. A responsible person can be an officer of a corporation, a partner, a sole proprietor, or an employee of any form of business. A trustee or agent with authority over the funds of the business can also be held responsible for the penalty.

Willfully means voluntarily, consciously, and intentionally. Paying other expenses of the business instead of the taxes due is acting willfully.

Federal Unemployment
(FUTA) Tax

You must pay FUTA tax if you meet either of the following tests.

• You paid cash wages of $20,000 or more to farm workers in any calendar quarter during the current or preceding calendar year.
• You employed 10 or more farm workers for some part of at least 1 day during any 20 or more different calendar weeks during the current or preceding calendar year.

These rules do not apply to exempt services of your spouse, your parents, or your children under age 21. See Family Employees, earlier.

Alien farm workers.   Wages paid to aliens admitted on a temporary basis to the United States to perform farm work (also known as H-2(A) visa workers) are exempt from FUTA tax. However, include your employment of these workers and the wages you paid them to determine whether you meet either test above.

Commodity wages.   Payments in kind for farm labor are not cash wages. Do not count them to figure whether you are subject to FUTA tax or to figure how much tax you owe.

Tax rate and credit.   The gross FUTA tax is 6.2% of the first $7,000 cash wages you pay each employee. However, you are given a credit of up to 5.4% for the state unemployment tax you pay. The net tax rate, therefore, can be as low as 0.8% (6.2% - 5.4%). If your state tax rate (experience rate) is less than 5.4%, you may still be allowed the full 5.4% credit.

If you do not pay the state tax, you cannot take the credit. If you are exempt from state unemployment tax for any reason, the full 6.2% rate applies. See the instructions for Form 940 for additional information.

More information.   For more information on FUTA tax, see Circular A.

Reporting and Paying
FUTA Tax

The FUTA tax is imposed on you as the employer. It must not be collected or deducted from the wages of your employees.

Form 940.   Report FUTA tax on Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return. The 2002 form is due January 31, 2003, (or February 10, 2003, if you deposit the tax on time and in full).

Form 940-EZ.   You can use Form 940-EZ, a simplified version of Form 940, if you meet all the following tests.

• You paid unemployment contributions to only one state.
• You paid all state unemployment contributions by the due date of Form 940 or 940-EZ.
• All wages subject to FUTA tax were also subject to your state's unemployment tax.

Deposits.   If at the end of any calendar quarter you owe, but have not yet deposited, more than $100 in FUTA tax for the year, you must make a deposit by the end of the following month. If the undeposited tax is $100 or less at the end of a quarter, you do not have to deposit it. You must add it to the tax for the next quarter. If the total undeposited tax is more than $100 at the end of the next quarter, a deposit will be required. If the total undeposited tax at the end of the 4th quarter is $100 or less, you can either make a deposit or pay it with your return by the January 31 due date.

Electronic deposit requirement.   If you are subject to the electronic deposit requirement, you must use EFTPS to deposit FUTA tax. See Reporting and Paying Social Security, Medicare, and Withheld Income Taxes, earlier, for a discussion of the requirement for making deposits electronically.

- Continue -